FDIC Issues Final Rules in Temporary Liquidity Guarantee Program: Changes made in Debt Guarantee and Transaction Account Guarantee
On Oct. 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program, or the Program, which is one of several recent government initiatives designed to improve the strength of financial institutions and enhance market liquidity. The Program consists of two parts: one part involves federal guarantees of certain issuances of senior unsecured debt by eligible institutions, or the Debt Guarantee, and the other part involves increased FDIC deposit insurance for non-interest-bearing transaction accounts, or the Transaction Account Guarantee. In early November, the FDIC issued guidance on the Program in the form of interim final rules, which were amended by the FDIC shortly thereafter (as amended, the Interim Rules).
On Nov. 21, 2008, the FDIC issued final rules relating to the Program (the Final Rules), affecting both parts of the Program. This advisory briefly summarizes the recent developments in the Program as a result of the promulgation of the Final Rules. (We summarized the initial highlights of the Program in an advisory bulletin in October1 and the highlights of the Interim Rules in an advisory bulletin in early November).2
Developments with respect to the Debt Guarantee
Most of the changes to the Program relate to the Debt Guarantee. Notably, the Final Rules (1) exclude short term debt from the Debt Guarantee, (2) restructure the fees for the Debt Guarantee to provide for sliding fees based on length to maturity of the debt, (3) add an alternative calculation for certain institutions to determine the maximum debt that may be issued subject to the Debt Guarantee, (4) allow depository institutions to aggregate its permissible debt issuances with those of a parent company that is an eligible entity under the Program, (5) establish a 20 percent risk weighting for debt guaranteed under the Program. Each of these changes is briefly summarized below; detailed explanations of the changes, and the reasoning behind them, are contained in the FDIC release relating to the Final Rules.3
Short-term indebtedness. As initially proposed by the FDIC, newly issued senior unsecured obligations of an eligible institution would be covered under the Debt Guarantee regardless of the original tenor of the obligation (although the guarantee itself would terminate on June 30, 2012, even if the debt remained outstanding after that date). The FDIC has now excluded obligations with a stated maturity of 30 days or less.4
Sliding fee scale. As initially proposed by the FDIC, the fee for the Debt Guarantee was an annualized rate of 75 basis points. The fees now are based on a sliding scale with obligations with maturities of less than 181 days being charged at an annualized rate of 50 basis points, obligations with maturities of 181 days to 364 days being charged at an annualized rate of 75 basis points, and obligations with maturities of 365 or more days being charged at an annualized rate of 100 basis points.5
Alternative guarantee limit. The Debt Guarantee originally was limited to cover an amount of debt equal to 125 percent of the par value of the participating entity's senior unsecured debt that was outstanding as of the close of business Sept. 30, 2008, and that was scheduled to mature on or before June 30, 2009. This continues to be the standard (although for the purpose of calculating the limit, debt with maturities of 30 days or less is not excluded). Although the FDIC previously indicated that it would consider on a case-by-case basis appropriate limits for institutions that had no senior unsecured debt outstanding as of Sept. 30, 2008, the Final Rules added an alternative calculation limit for such institutions that are depository institutions (non-depository institutions are still considered on a case-by-case basis). Such depository institutions have a Debt Guarantee limit of two percent of the institution's consolidated total liabilities as of Sept. 30, 2008.6
Debt limit aggregation. As initially proposed by the FDIC, the limit on debt of an eligible institution that could be guaranteed under the Debt Guarantee could not be aggregated with the limits of any affiliates of such eligible institution. Under the Final Rules, however, an eligible institution that is a depository institution may aggregate its debt limit with that of any direct or indirect parent that is also an eligible institution that participates in the Program.7 Any use by the subsidiary entity reduces the limit available to the parent. Note that parents cannot supplement their limits with those of their subsidiaries, nor may sister entities aggregate their limits.
Risk weighting. The FDIC and the other federal banking regulators have established a 20 percent risk weighting for all obligations subject to the Debt Guarantee.8
Developments with respect to the Transaction Account Guarantee
The most notable change with respect to the Transaction Account Guarantee is that the FDIC made two exceptions to the rule that the Transaction Account Guarantee applies only to non-interest-bearing transaction accounts. The Transaction Account Guarantee now applies to (1) all Interest on Lawyers Trust Accounts (commonly referred to as IOLTA accounts and which are often required by state law to be interest-bearing accounts) and (2) negotiable order of withdrawal accounts, or NOW accounts, that bear interest rates that are no more than .50 percent.9
Disclosure requirements unchanged
The FDIC left unchanged the disclosure requirements, including the requirement to post notices in branches concerning participation in the Transaction Account Guarantee Program by Dec. 19, 2008. We noted in the November client advisory that the FDIC had not provided any sample disclosure language. The FDIC has remedied this in the Final Rules by including safe-harbor disclosure language with respect both to the Debt Guarantee and to the Transaction Account Guarantee.10
The Final Rules did not alter any of the opt out deadlines. Accordingly, each eligible institution must decide on or before to Dec. 5, 2008, whether to affirmatively opt out of either portion of the Program. In addition, each eligible institution that elects to participate in the Debt Guarantee Program must also decide by December 5 whether to opt in to the Long Term Non-Guaranteed Debt Option, as described in our prior advisories.
Additional information about the Program may be found at the FDIC Web page for the Program.
4 The change is reflected in the definition of “senior unsecured indebtedness,” which now excludes such short-term obligations. 12 C.F.R. § 370.2(e).
5 12 C.F.R. § 370.6(d).
6 12 C.F.R. § 370.3(b)(2).
7 12 C.F.R. § 370.3(b)(8).
8 To be formalized in Appendix A to 12 C.F.R. 325, “Statement of Policy on Risk-Based Capital.”
9 12 C.F.R. § 370.2(h).
10 The sample disclosures are at 12 C.F.R. § 370.5(h).